P2P Platforms and Deposit Insurance

Following the failures of Silicon Valley Bank, Signature Bank, Silvergate Bank, and First Republic Bank, everyone has become more curious about federal deposit insurance coverage, and what is covered in which situations. In a recent Issue Spotlight, the CFPB has highlighted P2P payment platforms (PayPal, Venmo, Cash App, Apple Pay, Google Pay, etc.) to note that funds stored with these providers may not be covered by deposit insurance.

The FDIC deposit insurance system protects depositors at FDIC-insured banks against the loss of their insured deposits up to at least $250,000. Protecting small depositors has been an objective of the deposit insurance system since its founding. However, as new products and services are introduced, it is not always clear to consumers when, or under what conditions, they would be protected by deposit insurance.

P2P payment platforms exist, in part, to electronically transmit funds from A to B.  To accomplish this a consumer opens an account with one of these providers and then links a payment method, such as a bank account or debit card. Consumers can then send funds to another person who has an account with that payment app. Typically, any payments a consumer receives using a payment app are stored on that platform in a stored value account until the consumer requests a transfer of those funds out of their stored value account and into their bank account.

While consumers may perceive a stored value account as functioning like a traditional deposit account, deposit insurance would only apply to funds which are held at an FDIC-insured bank. If the consumers’ funds have not been deposited into an account at the bank, then those funds sitting in the stored value account would not normally be eligible for deposit insurance coverage.

Sometimes a customer’s funds are eligible for pass-through insurance if the customer engages in certain activities using the account, such as opening a debit card, enrolling in direct deposit, using the account to buy or receive crypto assets, or registering the account with the P2P provider’s partner bank. However, user agreements for these payment apps are often confusing about exactly where consumer funds are being held and under what conditions they are insured at a partner bank.

Additionally, some payment apps generate revenue by investing users’ funds in loans and bonds. The payment apps, therefore, have a financial incentive to keep customer funds on their platform in stored value accounts, and not automatically sweep them back to the customer’s bank account.

The implication is clear that funds stored in a payment app, rather than a bank, may be at higher risk of loss. Customer funds invested in securities or other non-deposit products may expose the P2P provider to the risk of insolvency, should the value of the investments decline. These providers could likewise be exposed to risk if customers withdraw their funds all at once. In the event of insolvency, customers may not be the only ones with claims on the P2P’s remaining assets, and even if consumers do not ultimately suffer a loss, they may face significant delays in accessing their funds during the bankruptcy process.

The safest place for consumers to store their money continues to be insured depository institutions. This issue touches bank policy, advertising and marketing, account agreements, and daily interactions with customers, so it’s important that everyone understand what deposit insurance is and how it protects depositors. Feel free to reach out to us on the hotline regarding deposit insurance coverage or anything related to it to see how we can help you and your connections with your customers.